December 2024 – By Dan Zalipski

As we close the book on 2024, we cannot help but to be thankful and marvel at the market results of the past two years in the face of tough conditions and dire predictions.  Absent a surprise in the last few weeks, the S&P 500 will have produced 20%+ returns in back-to-back years for just the fourth time in its history.  As we look forward to 2025 and calibrate our expectations, we have reasons to be optimistic, but we also find reasons to be cautious.  It is important to be informed and mindful of changing market trends; below are some observations and expectations for the year ahead:

• The economic fog is lifting but hasn’t fully dissipated: The economy has experienced significant shifts over the last few years, including aggressive rate hikes followed by a pivot to rate cuts. While inflation has moderated, it remains historically elevated, putting pressure on certain segments of the population while arguably benefiting others. The bifurcated nature of the economy will continue to pose challenges for monetary policymakers in 2025.
• Look for the economy to slow but not tip into recession: The economy will likely downshift throughout 2025 as consumer spending, which makes up roughly two-thirds of economic growth metrics, begins to moderate from recent breakneck speeds. Pent-up demand for business capital expenditures, favorable tax policy, and likely deregulation are expected to be positive catalysts that should help offset some consumer softening.
• Be prepared for inflation hiccups and changing narratives around rates: Some inflationary pressures may re-emerge in 2025 as new policies are digested and wealthier consumers remain fairly insulated; overall inflation is expected to remain subdued. Nevertheless, upticks in inflation could lead to changing narratives and a slower pace of Federal Reserve (Fed) rate cuts than expected that force markets to adjust to yields staying higher for longer.
• Remember that so goes employment, so will go the economy: The labor market continues to show signs that it is slowly shifting. Workers are becoming less inclined to switch jobs and the average workweek for private payrolls has declined, which is indicative of a weakening demand for labor. We expect the unemployment rate will continue to move up in the coming quarters, but only at a moderate pace. Anything more than gradual would be a clear sign that the economy is entering a more pronounced slowdown.
• Varied upside potential: If they persist, a combination of moderating inflation, stable interest rates, and strong earnings growth supports a higher S&P 500 valuation. Potential upside could come from lower rates, productivity gains, and confirmation of market friendly policies from the new administration.
• Potential risks: A much slower-than-expected economy, coupled with a volatile interest rate policy, would be a serious headwind. Additionally, resurgent inflationary pressures in response to new policy or another increase in geopolitical tensions could also further undermine the current positive narrative for stocks.
• Don’t expect a one-way street higher: Even in non-recessionary periods, it is still commonplace for equity bull markets to undergo 10% corrections along the way. Be prepared for bouts of volatility in 2025 and favor buying equities on market pullbacks.

Investment advice offered through HighPoint Advisor Group, LLC, a registered investment advisor. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendation for any individual. Although general strategies and / or opinions are revealed, this post is not intended to, nor does it represent or reflect, transactions or activity specific to any one account. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All data and information are gathered from sources believed to be reliable and is not warranted to be correct, complete, or accurate.

Investments carry the risk of loss including loss of principal. Past performance is never a guarantee of future results. Vantage Financial Partners Limited is not a tax advisor. Please consult a tax professional for any specific questions regarding your tax situation.